Focus: Lawyer hopes to restart debate on grey marketing

The lawyer for a chocolate importer hopes to re-ignite the debate over the legal status of grey marketing despite the company’s recent failure to get out of an agreement in which it promised to stop the practice.

Over the last couple of decades, some brand owners have turned to trademark enforcement proceedings to halt grey marketing, which involves purchasing genuine branded products abroad and then reselling them in competition with local distributors of the same items.

In Mars Canada Inc. v. Bemco Cash & Carry Inc., Ontario Superior Court Justice Frederick Myers ruled that while there was “nothing inherently wrong” with grey marketing, Bemco and its former owner Aizic Ebert still had to comply with their previous agreements to cease selling foreign-sourced products bearing any of Mars Canada’s trademarks. Toronto lawyer Patrick Summers, who acted for Bemco, says the decision has been appealed.

“The judge acknowledged the uncertainty in the law, but decided this was not the case to rule on it,” says Summers, a partner at Birenbaum Steinberg Landau Savin & Colraine LLP. “But at the very least, it should cause some discussion in the bar about the legal status of grey marketing.”

Ebert began selling U.S.-bought Mars products in Toronto almost two decades ago, undercutting retail prices offered by Mars Canada’s own distributors. When the Canadian subsidiary found out about his business, it sued Bemco and Ebert in the Federal Court.

Mars brought its most recent action against Bemco and Ebert in 2010, alleging breach of the settlement after discovering both were back in the grey marketing business. Myers’ judgment says Ebert’s wholesaling company had resumed importing Mars products from the U.S. and was selling them to a new retailer with a complicated legal relationship to Bemco.

“On the uncontested facts, despite Mr. Ebert’s attempted legal characterization of the facts, Bemco is doing and being paid to do the things it said it would not do. It is therefore in breach of its settlement agreement,” Myers wrote.

As long ago as 1996, the Federal Court of Appeal ruled in Smith & Nephew Inc. v. Glen Oak Inc. that Canadian licensees of trademarks owned by foreign parent companies cannot rely on their licensed trademark rights to prevent grey marketing. However, the court stopped short of saying what happens when the Canadian subsidiary or affiliate actually owns the trademark in this country.

In the Bemco case, Mars Canada owns the trademarks for various confectionery products, including Bounty, Milky Way, Snickers and Twix after they were assigned to them by their U.S. parent company. Bemco claimed the relationship between the two companies remained too close to allow the Canadian subsidiary to enforce the trademark rights. As a result, the grey marketer argued the earlier settlement agreements should be declared void for restraint of trade.

However, Myers ruled Bemco missed its chance to argue for the extension of the Smith & Nephew decision to Canadian trademark owners when it bowed to Mars Canada’s demands that it cease the sale of products bearing its trademarks.

“By raising the issue of restraint of trade in this case, they seek to unwind the very settlement to which they agreed and cause the grey marketing issue that they agreed to settle to be litigated. The fact that the agreement is a settlement agreement weighs heavily against it being seen to be prima facie void or at all contrary to public policy,” Myers wrote.

As part of its case, Bemco offered expert evidence about the tendency for grey marketing prohibitions to promote monopolistic pricing, but Myers sidestepped that issue in his ruling.

“Even if there is an interesting economic debate about whether grey marketing is pro-competitive and limits on grey marketing may be anti-competitive, that issue just does not arise on the facts of this case in light of the settlement agreements, the existence of presumptively valid trade-marks, and the unlawfulness of the defendants’ sales in any event,” Myers wrote, noting that Bemco’s sale of items without French language information or metric weights violates federal packaging and labelling laws.

Summers says Bemco’s appeal will again focus on the merits of grey marketing and the use of trademark enforcement to halt it.

“If we can get some sort of finding that what the defendants did here was not in breach of the plaintiff’s trademark rights, then it’s more difficult for Mars Canada to say that they had a valid reason for the agreements,” he says.

Devin Doyle, a lawyer with Ottawa intellectual property litigation boutique Aitken Klee LLP, says he would like to see an appeal court weigh in on the use of trademarks by Canadian subsidiaries in grey marketing cases.

“It’s definitely an important issue, because a lot of companies are affected on both sides of these cases. Right now, we’re in a kind of limbo phase where we are not sure what is legal, so to speak, and what isn’t,” he says. “Getting clarification would be very useful, regardless of which way the court goes.”

Until then, Doyle says further test cases may prove hard to come by because of the lopsidedness of available resources typically at play in grey marketing cases. Without clear case law in their favour, he says, many grey marketers will be tempted to settle rather than take on brand owners in court.

“Generally, you’re going to have a large company going after a much smaller business,” Doyle says. “In the Bemco case, it seems like they felt pushed around, so they wanted to go back and challenge the law.”

Tim Stevenson, a partner in the Ottawa office of intellectual property boutique Smart and Biggar Fetherstonhaugh, often acts for brand owners, but he says he, too, would like to see a more definitive ruling on grey market rights.

“If courts can decide a matter between two parties on a narrow issue, they will try to do that rather than expound on all the issues raised in a case, and rightly so,” he says. “But it’s always nice when you are instructing clients to have a clear statement of the law.”

In the meantime, Stevenson says he must piece together fact scenarios from various grey marketing decisions to find ones that best match his clients’ predicaments. He says brand owners will find their trademark enforcement cases strengthened against grey marketers where apparently identical products actually differ across international borders. For example, Stevenson says particular confectionery brands may be packaged or taste slightly different depending on the country in which they are sold.

“If you’ve got those material differences, that makes it much easier,” he says. “But you do have to do a detailed, thorough factual analysis before you come up with an answer to advise your clients because there are no clearcut rules on what is proper and what is improper.”

Still, Stevenson says the Bemco decision is also encouraging for brand owners who tackle grey marketing proactively by entering into contracts with distributors to prohibit the practice, even if they are not signed in the context of litigation.

“Restraint of trade struck me as a rather creative and novel defence, but I think the fact the court rejected it may have some impact more broadly on contracts,” he says.

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